USD/CAD Downtrend Resumes as Powell Calms Stock Market, Nikkei 225 at Risk

Canadian Dollar, USD/CAD, Nikkei 225, Jerome Powell, RBNZ, Stock Markets – Asia Pacific Market Open

• Fed Chair Jerome Powell quelled market volatility, USD/CAD extended losses
• APAC markets have the RBNZ to look forward to, will NZD/USD decline on it?
• Nikkei 225 may gap lower, room for losses apparent given distance to key SMA

At a first glance, taking a look at Wall Street’s performance revealed a relatively neutral session, with the tech-heavy Nasdaq Composite underperforming (-0.50%). The Dow Jones and S&P 500 climbed 0.05% and 0.13% respectively. But, this followed deep downside gaps, which were eventually filled in. The VIX market ‘fear gauge’ temporarily spiked to its highest in three weeks.

Sentiment was drastically deteriorating heading into the Federal Reserve’s semi-annual monetary policy report. This might have been due to profit-taking following persistent gains in stock market benchmarks since March. During the report to the Senate Banking Committee, Fed Chair Jerome Powell reiterated the central bank’s dovish stance, likely inspiring investors to ‘buy the dip’.

Mr Powell noted that they are still a longs way from their goals, but that recent developments point to an improved outlook for later this year. He did not express particular concern about rising longer-term Treasury rates, noting that this is due to higher growth and confidence expectations. The central bank also anticipates inflation to be volatile ahead, adding that they do not think it will rise to troubling levels.

Taking a look at foreign exchange markets, the US Dollar was cautiously lower, with the British Pound and Canadian Dollar outperforming. The latter saw a particular boost as sentiment recovered during the latter half of the North American trading session. The Swiss Franc was the worst-performing G10 currency, opening the door to further declines following notable technical breakouts.

Canadian Dollar Technical Analysis

USD/CAD extended its dominant downtrend since March 2020, closing at its lowest point this year so far. A further downside close under the 1.2590 – 1.2630 support zone may open the door to further losses as lows from April 2018 near. However, positive RSI divergence does show that downside momentum is fading, opening the door to a potential turn higher.

USD/CAD – Daily Chart

Chart Created in TradingView

Wednesday’s Asia Pacific Trading Session

Given the volatile Wall Street session, futures tracking the Nikkei 225 and Hang Seng are pointing lower as Wednesday gets going. This may open the door to a cautiously pessimistic tone, placing the growth-linked Australian and New Zealand Dollars at risk. NZD/USD is eyeing the RBNZ rate decision due at 1:00 GMT. Then, Governor Adrian Orr will speak during a news conference an hour later.

There may be some room for downside potential in the Kiwi Dollar. Rising longer-term New Zealand government bond yields reflect rising confidence in the economy alongside inflation bets. But, investors may be disappointed if the central bank highlights an improving economic outlook while simultaneously maintaining a dovish monetary policy stance. This may open the door to near-term Kiwi weakness.

Nikkei 225 Technical Analysis

After Japanese exchanges were offline yesterday for The Emperor’s Birthday, the Nikkei 225 may be eyeing immediate support below at 29933 which is the 38.2% Fibonacci extension. Key resistance sits above at 30645, or the midpoint of the extension. Negative RSI divergence is also present here. There may be room for deeper losses given that the 20-day Simple Moving Average sits around 29165. The latter may come into play to reinstate the dominant uptrend in the event of a turn lower.

Nikkei 225 – Daily Chart

Chart Created in TradingView

— Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter